When Can U.S. Taxpayers File for Penalty Relief with the IRS?

The Internal Revenue Service (IRS) imposes penalties on individual and corporate taxpayers for several reasons. These penalties begin to accrue immediately upon a filing or payment delinquency, and they can substantially increase taxpayers’ total liability. While some taxpayers will simply have to pay what they owe, there are various options for avoiding (or at least mitigating) liability for IRS penalties—one of which is filing for penalty relief.

Taxpayers can request penalty relief in connection with certain specified tax violations. In limited circumstances, the IRS offers penalty relief for:

• Erroneously claiming credits or deductions
• Failure to deposit employment taxes
• Failure to file an information return
• Failure to file a tax return
• Failure to pay taxes owed (including, but not limited to, due to a dishonored check)
• Underpayment due to inaccuracies
• Underpayment of estimated tax

The IRS also offers penalty relief in response to specific events that make it impossible or impractical for taxpayers to meet their filing or payment obligations on time. For example, most recently the IRS launched a COVID-19 penalty relief program for taxpayers affected by the pandemic in 2020 and 2021.

Three Types of Penalty Relief

Currently, the IRS has three standing penalty relief programs:

1. First-Time Abatements and Administrative Waivers

Eligible taxpayers who are facing penalties for the first time can seek relief from penalties imposed for failure to deposit, failure to file and failure to pay. The IRS also provides administrative waivers to taxpayers in some circumstances, such as when the IRS fails to release timely guidance on new tax laws or regulations.

2. Reasonable Cause and Good Faith

The IRS makes penalty relief available to eligible taxpayers who are able to show that they “acted with reasonable cause and in good faith.” The IRS lists fires, natural disasters, serious illness and death as examples of issues that may constitute reasonable cause for a filing or payment delay.

3. Statutory Exceptions to Penalty Liability

Taxpayers can also seek penalty relief based on certain statutory exceptions. Examples include receiving incorrect written advice from the IRS, living in a federal disaster area and being involved in military operations in a combat zone.

Alternatives to Filing for Penalty Relief

If you are not eligible for penalty relief (or if your business is not eligible for penalty relief), you may have other options for reducing or eliminating the amount you owe. Some examples of potential options include:

• File an Amended Return – If you (or your business) can file an amended return that reduces its tax liability, this can result in the elimination of the penalties on unpaid amounts not actually owed.
• File an Appeal – If you disagree with the IRS’ assessment of your tax or penalty liability, you can file an appeal with the IRS’ Independent Office of Appeals.
• Submit an Offer in Compromise – If you are not eligible (or your business is not eligible) for penalty relief and you cannot afford to pay what you (or your business) owe, you may be able to settle with the IRS through an offer in compromise.

Schedule an Appointment with Tax Attorney Kevin E. Thorn in Washington D.C.

If you would like to know more about your options for reducing your (or your business’s) liability to the IRS, we invite you to get in touch. To request a confidential consultation with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033, email ket@thornlawgroup.com or contact us online today.